UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2007
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File Number: 033-55254-27
BRIGHTEC, INC.
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(Name of small business issuer in its charter)
Nevada 87-0438637
------------------------------- ------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
8C Pleasant Street, First Floor, South Natick, MA 01760
-------------------------------------------------------
(Address of principal executive offices, Zip code)
(508) 647-9710
---------------------------
(Issuer's telephone number)
Advanced Lumitech, Inc.
-----------------------------------------
(Former name if changed from last report)
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value
------------------------------
(Title of class)
Check whether the Company (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports) and (2) has been
subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark whether the Company is a shell company (as defined in
Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
The Company had 143,142,837 shares of Common Stock, $0.001 par value, issued and
outstanding as of November 14, 2007.
Transitional Small Business Disclosure Format: [ ] Yes [X] No
INDEX
Page Number
Note Regarding Forward Looking Statements 3
Part I. Financial Information
---------------------
Item 1. Financial Statements
Consolidated Balance Sheet at September 30, 2007 - Unaudited 4
Consolidated Statements of Operations and Comprehensive Loss
for the Three and Nine Months Ended September 30, 2007
and 2006 (As Restated) - Unaudited 5
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2007 and 2006 (As Restated) - Unaudited 6
Notes to Consolidated Financial Statements - Unaudited 7 - 14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15 - 20
Item 3. Controls and Procedures 21
Part II. Other Information
-----------------
Item 1. Legal Proceedings 22
Item 2. Unregistered Sales of Equity and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 23
Signatures 24
Exhibit Index 25
Exhibit 10.29 Consulting Agreement dated September 11, 2007
between Brightec, Inc. and Jeffrey Stern,
Trustee of the Jeffrey Stern Revocable Trust
(filed herewith) E-1 - E-7
Exhibit 31 Certification of Chief Executive and Financial
Officer Pursuant to 18 U.S.C Section 1850, As
Adopted Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. (filed herewith) E - 8
Exhibit 32 Certification of Chief Executive and Financial
Officer Pursuant to Rule 13a-14(b) of the
Exchange Act and 18 U.S.C Section 1850, as
Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. (filed herewith) E - 9
2
Note Regarding Forward Looking Statements:
This Form 10-QSB and other reports filed by the Company from time to time with
the Securities and Exchange Commission (the "SEC"), as well as the Company's
press releases, contain or may contain forward-looking statements, within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The information provided
is based upon beliefs of, and information currently available to, the Company's
management, as well as estimates and assumptions made by the Company's
management. Statements that are not statements of historical fact may be deemed
to be forward-looking statements. Forward-looking statements can be identified
by the use of forward-looking terminology such as "believes", "may", "should",
"anticipates", "estimates", "expects", "future", "intends", "hopes", "plans" or
the negative thereof. Such forward-looking statements involve known and unknown
risks, uncertainties and other factors that could cause actual results of the
Company to vary materially from historical results or from any future results
expressed or implied in such forward-looking statements.
Any statements contained in this Form 10-QSB that do not describe historical
facts, including without limitation statements concerning expected revenues,
earnings, product introductions and general market conditions, may constitute
forward-looking statements as that term is within the meaning of Section 27A of
the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 193, as amended. Any such forward-looking statements contained
herein are based on current expectations, but are subject to a number of risks
and uncertainties that may cause actual results to differ materially from
expectations. The factors that could cause actual future results to differ
materially from current expectations include the following: the Company's
ability to raise the financing required to support the Company's operations; the
Company's ability to establish its intended operations; fluctuations in demand
for the Company's products and services; the Company's ability to manage its
growth; the Company's ability to develop, market and introduce new and enhanced
products on a timely basis; the Company's lack of customers; and the ability of
the Company to compete successfully in the future. Any forward-looking
statements should be considered in light of those factors.
The Company will provide upon request, copies of its quarterly and annual
reports, including interim unaudited and audited financial statements to its
security holders. The Company also files periodic reports with the SEC as well
as reports on Form 8-K, proxy or information statements and other reports
required of publicly held reporting companies. The public may read and copy any
materials the Company files with the SEC at the SEC's Public Reference Room at
100 F Street, NE,, Washington, D.C. 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
The SEC also maintains an Internet site that contains the reports, proxy and
information statements, and other information that the Company files
electronically with the SEC, which is available on the Internet at www.sec.gov.
Further information about the Company and its subsidiaries may be found at
www.brightec.com.
3
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Brightec, Inc. and Subsidiary
Consolidated Balance Sheet
September 30, 2007
(Unaudited)
ASSETS
Current assets
Cash $ 24,078
Accounts receivable 510
Inventory 252,197
Prepaid expenses 11,257
------------
TOTAL CURRENT ASSETS 288,042
------------
Office and photographic equipment 23,511
Less accumulated depreciation (23,511)
------------
--
------------
Deposit 2,041
Deferred offering costs 20,085
------------
22,126
------------
TOTAL ASSETS $ 310,168
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Line of credit $ 650,000
Accounts payable 140,110
Accrued liabilities (including related party interest of $10,390) 282,945
Advances due to related party 573,150
------------
TOTAL CURRENT LIABILITIES 1,646,205
------------
Stockholders' deficit
Preferred stock --
Common stock 143,143
Additional paid-in capital 12,461,923
Deferred compensation (58,358)
Accumulated deficit (14,083,770)
Accumulated other comprehensive income 201,025
------------
TOTAL STOCKHOLDERS' DEFICIT (1,336,037)
------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 310,168
============
The accompanying notes are an integral part of these financial statements.
4
Brightec, Inc. and Subsidiary
Consolidated Statements of Operations and Comprehensive Loss
(Unaudited)
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
------------------------------ ------------------------------
2007 2006 2007 2006
------------- ------------- ------------- -------------
(As Restated) (As Restated)
Sales $ 2,153 $ 294 $ 7,403 $ 10,882
Cost of sales 1,141 118 3,791 5,019
------------- ------------- ------------- -------------
Gross profit 1,012 176 3,612 5,863
------------- ------------- ------------- -------------
Operating expenses
Research and development 32,706 25,729 87,951 79,349
Selling and marketing 45,153 22,490 126,496 26,841
General and administrative 132,274 240,718 569,651 408,397
Stock based compensation 1,642 1,600,000 1,642 1,600,000
------------- ------------- ------------- -------------
211,775 1,888,937 785,740 2,114,587
------------- ------------- ------------- -------------
Operating loss (210,763) (1,888,761) (782,128) (2,108,724)
------------- ------------- ------------- -------------
Other Income (Expense)
Interest income - related party -- 3,182 37 9,443
Foreign exchange gains -- -- -- 17,656
Financing costs -- -- (128,680) --
Gain (loss) on value of derivative liabilities -- (162,545) -- 72,942
Interest expense (including related party
interest of $5,512, $375, $10,390 and
$7,095, respectively) (38,734) (23,542) (109,752) (30,041)
------------- ------------- ------------- -------------
(38,734) (182,905) (238,395) 70,000
------------- ------------- ------------- -------------
Net loss (249,497) (2,071,666) (1,020,523) (2,038,724)
Accumulated deficit - beginning (13,834,273) (10,740,045) (13,063,247) (10,772,987)
------------- ------------- ------------- -------------
Accumulated deficit - ending $ (14,083,770) $ (12,811,711) $ (14,083,770) $ (12,811,711)
============= ============= ============= =============
Basic and diluted net loss per share $ -- $ (0.02) $ (0.01) $ (0.02)
============= ============= ============= =============
Weighted average number of shares used in
computation of basic and diluted net loss per share 141,577,620 100,000,000 132,421,726 100,000,000
============= ============= ============= =============
COMPREHENSIVE LOSS
Net loss $ (249,497) $ (2,071,666) $ (1,020,523) $ (2,038,724)
Foreign currency translation gain (loss) 301 9,394 2,081 (4,855)
------------- ------------- ------------- -------------
Comprehensive loss $ (249,196) $ (2,062,272) $ (1,018,442) $ (2,043,579)
============= ============= ============= =============
The accompanying notes are an integral part of these financial statements.
5
Brightec, Inc. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
For the Nine Months Ended
September 30,
----------------------------
2007 2006
------------ ------------
(As Restated)
Cash flows from operating activities
Net loss $ (1,020,523) $ (2,038,724)
Adjustments to reconcile net loss to net cash used for
operating activities:
Accrued interest on advances from related party 10,390 (7,050)
Accrued interest on note receivable - related party (37) --
Gain on value of derivative liabilities -- (72,942)
Financing costs associated with stock based transactions 128,680 --
Amortization of deferred financing costs 44,369 35,495
Stock based compensation 1,642 1,600,000
General and administrative expenses associated with stock
based transactions 60,500 --
Selling and marketing expenses associated with stock based
transactions 22,500 --
Changes in operating assets and liabilities:
(Increase) decrease in:
Accounts receivable (510) 3,183
Inventory (153,607) (51,099)
Prepaid expenses (1,089) 1,138
Deposit 744 --
Increase (decrease) in:
Accounts payable 60,000 (31,859)
Accrued liabilities 43,007 68,575
------------ ------------
Net cash used for operating activities (803,934) (493,283)
------------ ------------
Cash flows from investing activities
Repayment of note receivable - related party 11,030 --
------------ ------------
Cash flows from financing activities
Cash received for sale of common stock, exercise of warrants
and stock subscribed -- 120,000
Advances on line of credit -- 550,000
Advances received from related party 802,400 130,600
Payment of deferred financing expense -- (37,500)
Repayment of advances from related party (19,250) (239,200)
Payment of deferred offering costs (20,085) --
------------ ------------
Net cash provided by financing activities 763,065 523,900
------------ ------------
Effects of changes in foreign exchange rates 2,081 (4,855)
------------ ------------
Net increase (decrease) in cash and cash equivalents (27,758) 25,762
Cash and cash equivalents - beginning 51,836 2,445
------------ ------------
Cash and cash equivalents - ending $ 24,078 $ 28,207
============ ============
Supplemental disclosures of cash flows information
Cash paid during the period for interest $ 110,113 $ 20,874
============ ============
Non-cash activities
Liability to stockholders for shares redeemed and cancelled $ -- $ 26,208
============ ============
Exercise of warrants classified as liabilities $ -- $ (5,472)
============ ============
Issuance of warrants in connection with line of credit $ -- $ 68,985
============ ============
Issuance of warrants related to private placements $ 4,244 $ 193,176
============ ============
Issuance of common stock in satisfaction of accrued
liabilities - related party $ 150,000 $ --
============ ============
Issuance of common stock in satisfaction of advances from
related party $ 210,000 $ --
============ ============
Issuance of common stock for services $ 60,000 $ --
============ ============
The accompanying notes are an integral part of these financial statements.
6
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements
(Unaudited)
NOTE 1 - OPERATIONS
Brightec, Inc. (formerly Advanced Lumitech, Inc.) ("BRTE" or the "Company")
develops and markets luminescent films incorporating luminescent or
phosphorescent pigments (the "Luminescent Product"). These pigments absorb and
re-emit visible light producing a "glow" which accounts for the common
terminology "glow in the dark." The Company's anticipates that its Luminescent
Product will be sold primarily as a printable luminescent film designed to add
luminescence to existing or new products. The Company uses third parties for
manufacturing, and markets and sells graphic quality printable luminescent
films. These films are based on the Company's proprietary and patented
technology, which enables prints to be of photographic quality by day and
luminescent under low light or night conditions. The Company expects that its
Luminescent Product will be available for sale in a number of versions
appropriate for commonly used commercial and personal printing technology,
including offset printing, laser or inkjet printing, plus a variety of "print on
demand" digital technologies. The Company offers its products in sheets and
rolls.
Restatement of September 30, 2006 Interim Consolidated Financial Statements
On May 9, 2007, the Company amended its Quarterly Report on Form 10-QSB for the
period September 30, 2006, as previously filed on November 20, 2006.
The Company determined that the stock redemption agreements between the Company
and certain stockholders were improperly marked-to-market, with the changes in
the fair value improperly reported as gains or losses in fair value of
derivative liabilities on the Company's statement of operations. As a result,
the Company increased its liability to stockholders for shares redeemed by
$1,296,098, increased additional paid-in capital by $55,745 and increased
accumulated deficit by $1,326,842 to reverse the net gains recognized resulting
from mark-to market adjustments prior to January 1, 2006. For the three and nine
month periods ending September 30, 2006, the Company reversed recognized gains
of $0 and $133,155, respectively.
The effect of these restatements was to decrease net income by $0 (less than
$0.01 per share) and $133,155 (less than $0.01 per share) for the three and nine
month periods ended September 30, 2006, respectively.
NOTE 2 - INTERIM FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements at September 30,
2007 and for the three and nine month periods ended September 30, 2007 and 2006,
respectively, include the accounts of the Company and its wholly-owned Swiss
subsidiary, Brightec S.A. (the "Subsidiary"). All inter-company transactions and
balances have been eliminated in consolidation. In our opinion, these unaudited
consolidated financial statements have been prepared on the same basis as the
audited consolidated financial statements included in our Annual Report on Form
10-KSB for the year ended December 31, 2006 and include all adjustments
necessary to make the financial statements not misleading. Certain footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted in accordance with rules of the Securities and Exchange
Commission for interim reporting. These consolidated financial statements should
be read in conjunction with the audited consolidated financial statements
included in our Annual Report on Form 10-KSB for the year ended December 31,
2006.
NOTE 3 - LIQUIDITY, MANAGEMENT PLANS AND GOING CONCERN
The Company has a working capital deficit of $1,358,163, an accumulated deficit
of $14,083,770 at September 30, 2007 and recurring net losses since inception.
The ability of the Company to continue to operate as a going concern is
primarily dependent upon the ability of the Company to raise the necessary
financing to effectively produce and market Brightec products at competitive
prices, to establish profitable operations and to generate positive operating
cash flows. If the Company fails to raise funds or the Company is unable to
generate operating profits and positive cash flows, there are no assurances that
the Company will be able to continue as a going concern and it may be unable to
recover the carrying value of its assets.
Management believes that it will continue to be successful in raising the
necessary financing to fund the Company's operations through the 2007 calendar
year; however, there can be no assurances that such financing can be obtained.
Accordingly, management believes that no adjustments or reclassifications of
recorded assets and liabilities are necessary at this time.
7
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 3 - LIQUIDITY, MANAGEMENT PLANS AND GOING CONCERN - continued
On March 30, 2007 (the "Closing Date"), the Company entered into a Standby
Equity Distribution Agreement (the "SEDA") with Cornell Capital Partners, LP
("Cornell") pursuant to which the Company may, at its discretion and under
certain circumstances, periodically sell to Cornell shares of its common stock,
par value $0.001 per share (the "Common Stock") for a total purchase price of up
to $10,000,000. See NOTE 12 - COMMON STOCK - STANDBY EQUITY DISTRIBUTION
AGREEMENT.
NOTE 4 - EARNINGS (LOSS) PER SHARE
The Company computes earnings or loss per share in accordance with Statement of
Financial Accounting Standard No. 128, "Earnings Per Share." Basic earnings per
share, is computed by dividing income available to common stockholders by the
weighted average number of common shares outstanding. Diluted earnings per share
reflect the potential dilution that could occur if securities or other
agreements to issue common stock were exercised or converted into common stock,
only in the periods in which the effect is dilutive. The following securities
have been excluded from the calculation of net loss per share, as their effect
would be anti-dilutive:
For the Three Months For the Nine Months
Ended September 30, Ended September 30,
---------------------------- -----------------------------
2007 2006 2007 2006
------------ ------------ ------------ -------------
Warrants (weighted average) 6,320,832 6,737,499 6,366,925 4,910,179
============ ============ ============ ============
Convertible line of credit (weighted average) 5,416,667 4,201,739 5,416,667 1,590,354
============ ============ ============ ============
Stock options (weighted average) 23,847,183 1,628,016 24,586,915 548,635
============ ============ ============ ============
NOTE 5 - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market
value and consist of the following at September 30, 2007:
Raw materials $ 41,257
Work in process 136,014
Finished goods 74,926
------------
$ 252,197
============
NOTE 6 - DEFERRED FINANCING EXPENSES
In connection with the Loan and Security Agreement (the "Loan and Security
Agreement") entered into on June 8, 2006 between the Company and Ross/Fialkow
Capital Partners, LLC ("Ross/Fialkow"), Trustee of Brightec Capital Trust (see
NOTE 11 - LINE OF CREDIT), the Company agreed to pay a commitment fee of $37,500
to Ross/Fialkow and issued a warrant to Ross/Fialkow to purchase 1,500,000
shares of the Company's common stock at an exercise price of $0.12 per share.
The warrant was valued at $68,985 using the Black/Scholes method of valuing
options and warrants. These amounts are being amortized over the term of the
Loan and Security Agreement (twelve months). As of September 30, 2007, the full
amount of the deferred financing expenses had been amortized. Amortization
expense related to the deferred financing expenses, for the three and nine month
periods ended September 30, 2007 and 2006 was $0 and $26,621, $44,369 and
$35,495, respectively.
NOTE 7 - INCOME TAXES
The Company has not calculated the tax benefits of its net operating losses as
of September 30, 2007 and December 31, 2006 since it does not have the required
information. The Company has not filed its federal and state corporate tax
returns for years ended December 31, 2005, 2004, 2003, 2002 and 2000. The tax
return filed for 2001 will need to be amended, if permitted by statute. Due to
the uncertainty over the Company's ability to utilize these operating losses,
any deferred tax assets, when determined, would be fully offset by a valuation
allowance.
8
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 8 - RELATED PARTY TRANSACTIONS
NOTE RECEIVABLE - RELATED PARTY
As of December 31, 2006, a note was receivable from the Company's president, who
is also a director and stockholder. The note, due no later than December 31,
2011, bore interest at a fixed rate of 5.05% and was full-recourse. Interest on
the note was accrued quarterly and due annually. During the nine month period
ended September 30, 2007, the entire outstanding balance of $10,993 plus accrued
interest was paid in full. The Company recognized interest income of $0, $3,148,
$37, $6,261 for each of the three and nine month periods ended September 30,
2007 and 2006, respectively.
ADVANCES FROM RELATED PARTY
During the six month period ended June 30, 2007, the Company's president made
advances to the Company of $590,000, of which $11,030 was used to repay the
aforementioned note receivable from him. The Company did not repay any of the
outstanding advances. On June 18, 2007, the Company repaid $210,000 of the
outstanding advances through the issuance of 7,000,000 shares of the Company's
common stock at a price of $0.03 per share, the closing price of the Company's
common stock on that date. During the three month period ended September 30,
2007, he made additional advances to the Company of $212,400. Of those proceeds,
$8,220 was used to pay certain payroll taxes on $150,000 of non-cash
compensation received (5,000,000 shares of common stock issued on June 18, 2007
at $0.03 per share) which would customarily be withheld from his salary had it
been in the form of cash. As of September 30, 2007, the Company owed its
president $573,150.
All such aforementioned advances bear interest at the Internal Revenue Service
short term "Applicable Federal Rate" (4.71% at September 30, 2007) calculated
and accrued monthly. For the three and nine month periods ended September 30,
2007 and 2006, the Company incurred $5,512, $375, $10,390 and $7,095 of interest
expense on the outstanding advances.
CONSULTING CONTRACT
On September 11, 2007, the Company issued 2,000,000 shares of common stock,
valued at $60,000, as consideration for a two year consulting contract with a
significant stockholder. These shares were issued at $0.03 per share, the
closing price of the Company's common stock on the aforementioned date. For each
of the three and nine month periods ending September 30, 2007, the Company
recognized an expense of $1,642, which is recorded as stock based compensation
in the statement of operations.
NOTE 9 - LINE OF CREDIT
On June 8, 2006, the Company entered into the Loan and Security Agreement with
Ross/Fialkow, in the amount of $750,000. On June 27, 2007, the expiration date
of the Loan and Security Agreement, originally July 15, 2007, was extended until
December 31, 2007. The Company incurred a $5,000 renewal fee for the extension.
Advances from the line of credit bear interest at 20% per annum. The principal
amount of the loan plus accrued but unpaid interest, if any, is convertible at
any time prior to payment at the election of Ross/Fialkow, into the Company's
common stock at the rate of $0.12 per share. Such shares carry piggy-back
registration rights. All assets of the Company have been pledged, including the
assets of the Subsidiary.
At December 31, 2006, the Company was not in compliance with the terms of the
Loan and Security Agreement as it did not file a registration statement (the
"Registration Statement") by December 31, 2006. On March 15, 2007, the Loan and
Security Agreement was amended as follows:
1. The due date of the agreement was extended to July 15, 2007.
2. The date by which the Company was required to file the
Registration Statement on Form S-1 (or SB-2), covering the
underlying shares of common stock to potentially be issued
upon conversion, was extended to July 15, 2007.
The Company filed the required Registration Statement on Form SB-2 with the SEC
on July 6, 2007. On July 25, 2007, the Company received a comment letter from
the SEC regarding the Registration Statement. The Company is currently
9
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 9 - LINE OF CREDIT - continued
preparing its response to the SEC and anticipating filing an amended
Registration Statement to address the comments in the SEC's letter.
As of September 30, 2007, the outstanding balance of the line of credit was
$650,000. Interest expense related to the line of credit, for the three and nine
month periods ended September 30, 2007 and 2006 was to $33,222, $23,917, $99,362
and $22,946, respectively.
NOTE 10 - ACCRUED LIABILITIES
At September 30, 2007, the balance of accrued liabilities consisted of the
following:
Executive officer compensation $ 150,000
Professional fees 70,901
Employee compensation 40,000
Payroll and other taxes 596
Interest (including related party
interest of $10,390) 21,223
Other 225
------------
$ 282,945
============
NOTE 11 - WARRANT LIABILITY
Prior to September 25, 2006, the Company had issued all of its shares of
authorized common stock. As a result, the value of warrants issued had to be
recognized as a liability pursuant to Emerging Issues Task Force 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock." The Company was required to re-value the
warrants at the end of every reporting period with the change in value reported
on the statement of operations as "Gain (Loss) on Value of Derivative
Liabilities" in the period in which the change occurred. For the three and nine
month periods ended September 30, 2006, the Company recognized a gain (loss) on
the value of derivative liabilities of $(162,545) and $72,942, respectively.
On September 25, 2006, at a special meeting of the Company's stockholders, the
stockholders voted to increase the number of authorized shares of common stock
from 100 million to 245 million. This resulted in the elimination of the
requirement to classify the value of the warrants as a liability. From the date
of the various issuances through September 25, 2006, the Company valued the
warrants at the end of each reporting period.
NOTE 12 - CAPITAL STOCK
NUMBER OF SHARES OF COMMON STOCK AUTHORIZED, ISSUED AND OUTSTANDING
Under the Company's charter, 245,000,000 shares of $0.001 par value common stock
are authorized. As of September 30, 2007, 143,142,837 shares of common stock
were issued and outstanding.
PREFERRED STOCK
Five million shares of "blank check" preferred stock are authorized under the
Company's Amended Articles of Incorporation. The terms, rights and features of
the preferred stock will be determined by the Board of Directors upon issuance.
Subject to the provisions of the Company's Certificate of Amendment to its
Articles of Incorporation and the limitations prescribed by law, the Board of
Directors is expressly authorized, at its discretion, to adopt resolutions to
issue shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, including dividend
rights (including whether the dividends are cumulative), dividend rates, terms
of redemption (including sinking fund provisions), redemption prices, conversion
rights and liquidation preferences of the shares constituting any series of the
preferred stock, in each case without any further action or vote by the
stockholders. The Board of Directors is required to make any determination to
10
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 12 - CAPITAL STOCK - continued
PREFERRED STOCK - continued
issue shares of preferred stock based on its judgment as to the best interests
of the Company and its stockholders.
ISSUANCES OF COMMON STOCK
At December 31, 2006, the Company had issued 124,698,935 shares of its common
stock.
On March 30, 2007, the Company issued 4,000,000 shares of common stock, valued
at $164,000, to Cornell as a commitment fee in connection with the signing the
SEDA on the same date. For the three months ended March 31, 2007, the Company
recognized the $164,000 as an offset to additional paid-in capital based on the
market price of $0.041 per share on the aforementioned date.
In addition, on March 30, 2007, the Company issued 243,902 shares of common
stock, valued at $10,000, to Newbridge Securities Corporation ("Newbridge"), as
consideration in connection with the Placement Agent Agreement (the "PAA") of
the same date. For the three months ended March 31, 2007, the Company recognized
the $10,000 as an offset to additional paid-in capital based on the market price
of $0.041 per share on the aforementioned date.
On June 7, 2007, the Company issued 200,000 shares of common stock, valued at
$8,000, under an agreement and in satisfaction of certain marketing and sales
fees. For the three and nine month periods ended September 30, 2007, the Company
recognized the $0 and $8,000, respectively, as selling and marketing expense
based on the market price of $0.04 per share, the market price of the Company's
stock on the date the agreement was reached.
On June 18, 2007, the Company issued 5,000,000 shares of its common stock,
valued at $150,000, to its president as payment for his current year salary
through June 30, 2007 ($75,000) and for unpaid amounts from prior years
($75,000). The number of shares issued to the president was based on the closing
market price of the Company's common stock of $0.03 per share on June 15, 2007,
the date of the Board of Directors' corporate resolution to issue the shares.
On June 18, 2007, the Company also issued 7,000,000 shares of its common stock,
valued at $210,000, to its president as repayment of certain cash advances made
by him to the Company. The number of shares of common stock issued was based on
the closing market price of the Company's common stock of $0.03 per share on
June 15, 2007, the date of the Board of Directors' corporate resolution to issue
the shares.
On September 11, 2007, the Company issued 2,000,000 shares of its common stock,
valued at $60,000, to one of its significant stockholders in satisfaction of
consulting contract entered into on the same date. The number of shares of
common stock issued was based on the closing market price of the Company's
common stock of $0.03 per share on September 11, 2007, the date of the Board of
Directors' corporate resolution to enter into the contract and issue the shares.
As of September 30, 2007, as a result of the aforementioned transactions, the
Company had issued 143,142,837 shares of its common stock.
STANDBY EQUITY DISTRIBUTION AGREEMENT
On the Closing Date, the Company entered into a SEDA with Cornell pursuant to
which the Company may, at its discretion, under certain circumstances (as
described below), periodically sell to Cornell shares of the Common Stock for a
total purchase price of up to $10,000,000. For each share of the Common Stock
purchased under the SEDA, Cornell will pay to the Company ninety-six percent
(96%) of the lowest volume weighted average price (as quoted by Bloomberg, LP)
of the Common Stock during the five (5) consecutive trading days after the
Advance Notice Date (as such term is defined in the SEDA), subject to any
reduction pursuant to the terms therein. On the Closing Date, the Company paid
to Cornell a non-refundable due diligence fee equal to $5,000 and issued
4,000,000 shares of common stock ("Commitment Shares") to Cornell as a
commitment fee, of which 2,000,000 Commitment Shares will have demand
11
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 12 - CAPITAL STOCK - continued
STANDBY EQUITY DISTRIBUTION AGREEMENT - continued
registration rights and 2,000,000 Commitment Shares will have "piggy-back"
registration rights. Cornell will retain five percent (5%) of each cash advance
under the SEDA. The Company has paid to Yorkville Advisors, LLC ("Yorkville") a
structuring fee equal to $15,000 on the Closing Date and shall pay $500 to
Yorkville on each Advance Date directly out of the gross proceeds of each
Advance (as such terms are defined in the SEDA). Cornell's obligation to
purchase shares of Common Stock under the SEDA is subject to certain conditions,
including, without limitation: (a) the Company obtaining an effective
registration statement for shares of its Common Stock sold under the SEDA
pursuant to that certain Registration Rights Agreement, dated as of the Closing
Date, by and between the Company and Cornell and (b) the amount for each Advance
as designated by the Company in the applicable Advance Notice shall not be more
than $300,000.
The Company also entered into the PAA, dated as of the Closing Date, by and
between the Company and Newbridge pursuant to which the Company engaged
Newbridge to act as it exclusive placement agent in connection with the SEDA.
Upon the execution of the PAA, the Company issued to Newbridge 243,902 shares
(the "Placement Agent Shares") of the Company's Common Stock. Newbridge is
entitled to "piggy-back" registration rights with respect to the Placement Agent
Shares.
DEFERRED OFFERING COSTS
The Company paid $15,000 to Yorkville for structuring fees, $5,000 to Cornell
for due diligence fees and $85 to record the issuance of the Cornell and
Newbridge shares with the Company's stock transfer agent. As shares of the
Company's common stock cannot be sold to Cornell until the Company files, and
has declared effective, the Registration Statement on Form SB-2, filed with the
SEC on July 6, 2007 (subject to amendment), such costs were deferred. Total
deferred offering costs at September 30, 2007 amounted to $20,085. Such costs
will be offset against equity raised.
ISSUANCES OF WARRANTS
The Company did not issue any warrants during the three or nine month periods
ended September 30, 2007. During the three and nine month periods ended
September 30, 2007, warrants for the purchase of 0 and 416,667 shares of the
Company's common stock expired.
On April 1, 2007 and June 27, 2007, the Company amended three of its previously
issued warrants to extend the exercise period of two warrants and modify the
time period (from 60 days to 61 days) in which the option holder can notify the
Company of his/her desire to exercise the options. Generally accepted accounting
principles requires that when the terms of a previously issued warrant are
modified, the modification is treated as an exchange of the original warrant.
The excess of the value of the warrant on the date the modification is effective
over the value of the warrant on the date immediately preceding the modification
date, if any, is amortized to expense over the remaining vesting period (or
recognized immediately if the warrants are vested 100%).
Accordingly, the fair value of the warrants was estimated on March 31, 2007 and
April 1, 2007 and June 26, 2007 and June 27, 2007 using the Black/Scholes
pricing model using the following assumptions: risk-free rate of return range of
4.56% to 4.91%; no dividend yield; an expected life of approximately 13 months
to 82 months; and a volatility factor ranging from 127.42% to 337.77%. As a
result of the revaluations, the Company recognized financing costs of $128,680.
As of September 30, 2007, the Company has warrants outstanding for the purchase
of 6,320,832 shares of common stock at an exercise price of $0.12 per share.
ISSUANCE OF OPTIONS
The Company did not issue any options during the three and nine month periods
ended September 30, 2007. During the three and nine month periods ended
September 30, 2007, options for the purchase of 4,462,911 and 4,462,911 shares
of the Company's common stock expired.
12
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 12 - CAPITAL STOCK - continued
ISSUANCE OF OPTIONS - continued
As of September 30, 2007, the Company has options outstanding for the purchase
of 20,000,000 shares of common stock.
2006 STOCK INCENTIVE PLAN
An aggregate of 50 million shares of common stock are reserved for issuance and
available for awards under the 2006 Plan.
OTHER OPTION GRANTS
In the second quarter of 2005, the Company's Board of Directors granted options
to employees and/or directors to purchase 20,000,000 shares of common stock at
an exercise price of $0.12 per share, to be fully vested as of April 28, 2005
and exercisable for a period of ten years. For accounting purposes, these
options were not deemed granted because the Company did not have a sufficient
number of shares of authorized common stock available to issue upon the exercise
of any of the options.
As previously discussed, on September 25, 2006, at a special meeting of the
Company stockholders, the stockholders approved an increase in the amount of the
Company's authorized shares of common stock from 100 million to 245 million.
Since the required approval has been obtained from the stockholders, the Company
recognized $1,600,000 of stock based compensation for the three and nine month
periods ended September 30, 2006.
NOTE 13 - COMPREHENSIVE INCOME (LOSS)
The Company reports comprehensive income (loss) in addition to net income (loss)
from operations. Comprehensive income (loss) is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net income
(loss).
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Stadards Board (the "FASB") issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
interpretation of FASB Statement No. 109" ("FIN 48"), which clarifies the
accounting for uncertainty in income taxes recognized in financial statements in
accordance with FASB No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. The provisions of FIN 48 are effective for fiscal years beginning
after December 15, 2006, with the cumulative effect of the change in accounting
principle recorded as an adjustment to opening retained earnings. The Company is
currently evaluating the impact of adopting FIN 48 and cannot yet determine the
impact of its adoption all of its outstanding federal and state tax reporting
obligations are fulfilled.
In September 2006, the FASB issued Statement of Financial Accounting Standard
("SFAS") No. 157, "Fair Value Measurements" ("SFAS 157"), which amends and puts
in one place, guidance on the use of fair value measurements which had been
spread through four Accounting Principles Board Opinions and thirty-seven FASB
Standards. No extensions of the use of fair value measurements are contained in
SFAS 157 and with some special industry exceptions (e.g., broker-dealers), no
significant changes in practice should ensue. SFAS 157 is to be applied to
financial statements beginning after November 15, 2007. The adoption of SFAS 157
is not expected to have a material impact on the financial position or results
of operations of the Company.
In addition, in September 2006, the FASB issued SFAS No. 158, "Employers'
Accounting for Defined Benefit Pension Plans and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106 and 132(R)" ("SFAS 158"). SFAS 158
requires recognition in the balance sheet of the funded status of pension plans,
rather than footnote disclosure which is current practice. Publicly traded
companies are to reflect the new standard in financial statements ending after
December 15, 2006 and non-public companies are to apply it in statements
13
Brightec, Inc. and Subsidiary
Notes to Consolidated Financial Statements - continued
(Unaudited)
NOTE 14 - RECENT ACCOUNTING PRONOUNCEMENTS - continued
ending after June 15, 2007. As the Company does not maintain a defined benefit
pension plan and has no current plans to do so, SFAS 158 will not have any
current impact on the Company's financial position or results of operations.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" ("SAB 108"), to provide
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. Under SAB 108, companies should evaluate a misstatement based on its
impact on the current year income statement, as well as the cumulative effect of
correcting such misstatements that existed in prior years existing in the
current year's ending balance sheet. SAB 108 will become effective for the
Company in its fiscal year ending December 31, 2007. The Company is currently
evaluating the impact of the provisions of SAB 108 on its consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities" ("SFAS 159"). SFAS 159 allows
entities the option to measure eligible financial instruments at fair value as
of specified dates. Such election, which may be applied on an instrument by
instrument basis, is typically irrevocable once elected. SFAS 159 is effective
for fiscal years beginning after November 15, 2007, and early application is
allowed under certain circumstances. The Company does not expect the adoption of
SFAS 159 to have a material impact on its consolidated financial position or
results of operations.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of our financial condition and results of our
operations should be read in conjunction with the Consolidated Financial
Statements and Notes thereto included elsewhere in this Quarterly Report on Form
10-QSB and our Annual Report on Form 10-KSB for the year ended December 31,
2006. This Quarterly Report on Form 10-QSB contains forward-looking statements
based on our current expectations, assumptions, estimates and projections about
us and our industry. These forward-looking statements are usually accompanied by
words such as "believes," "anticipates," "plans," "expects" and similar
expressions. Forward-looking statements involve risks and uncertainties and our
actual results may differ materially from the results anticipated in these
forward-looking statements as a result of certain factors.
CRITICAL ACCOUNTING POLICIES
Certain of our accounting policies are particularly important to the portrayal
and understanding of our financial position and results of our operations and
require us to apply significant judgment in their application. As a result,
these policies are subject to an inherent degree of uncertainty. In applying
these policies, we use our judgment in making certain assumptions and estimates.
Our critical accounting policies, which consist of revenue recognition, account
receivable reserves and inventories, are described in our Annual Report on Form
10-KSB for the year ended December 31, 2006. There have been no material changes
to our critical accounting policies as of September 30, 2007.
OVERVIEW
We develop and market luminescent films incorporating luminescent or
phosphorescent pigments (the "Luminescent Product"). These pigments absorb and
re-emit visible light producing a "glow" which accounts for the common
terminology "glow in the dark." Our Luminescent Product has been and will be
sold primarily as a printable luminescent film designed to add luminescence to
existing or new products. We manufacture through third-party manufacturers,
market and sell graphic quality printable luminescent films. These films are
based on our proprietary and patented technology that enables prints to be of
photographic quality by day and luminescent by night. We expect that our
Luminescent Product will be available for sale in a number of versions
appropriate for commonly used commercial and personal printing technology,
including offset printing or inkjet printing, plus a variety of "print on
demand" digital technologies. We currently expect to offer our products in
sheets and rolls.
We have completed the process of redesigning our website and have begun to
introduce our new product lines to the marketplace. We started launching our new
products in September 2007. During the first and second quarters of 2007, as a
result of our anticipated new product lines introduction, we began building, and
continue to build, our inventory to meet the anticipated product demand.
Products to be introduced by the end of the year 2007 include a line of new and
improved printing quality inkjet sheets of different formats, which will be sold
in small packs and bulk packs for the home, office and photographic digital
printing market, a line of inkjet rolls and sheets for the wide format digital
printing market, and a line of offset sheets and flexo rolls for the commercial
printing market.
We achieved our goal of launching our new website in September 2007 and we began
to introduce our new product line shortly thereafter. We are anticipating
introducing a new product line every subsequent month and having all of our
currently planned products introduced to the market by the end of 2007.
ABILITY TO CONTINUE AS A GOING CONCERN
We have a working capital deficit of approximately $1,358,000, an accumulated
deficit of approximately $14,084,000 at September 30, 2007 and recurring
negative operating cash flows since inception. Our future viability of is
dependent upon our ability to obtain additional financing and achieve
profitability in future operations. These circumstances raise substantial doubt
about our ability to continue as a going concern. Our auditors have included a
"going concern" qualification in their auditor's report for the year ended
December 31, 2006. Such a "going concern" qualification may make it more
difficult for us to raise funds when needed. We believe we have the ability to
obtain additional funds from new investors, our principal stockholders and
employees through the issuance of additional debt, equity securities and/or the
exercise of warrants and stock options. In March 2007, we entered into a
$10,000,000 SEDA as described in the accompanying notes to our consolidated
financial statements. In addition, our president has advanced $902,400 from
January 1, 2007 through November 14, 2007.
15
We continue to seek additional financing from investors; however, there can be
no assurances that we will be able to raise the funds we require, or that if
such funds are available, that they will be available on commercially reasonable
terms. Our ability to continue to operate as a going concern is primarily
dependent upon our ability to generate the necessary financing to effectively
market and produce our products, to establish profitable operations and to
generate positive operating cash flows. If we fail to raise funds or are unable
to generate operating profits and positive cash flows, there are no assurances
that we will be able to continue as a going concern and we may be unable to
recover the carrying value of our assets. We believe that we will be successful
in generating the necessary financing to fund our operations through the 2007
calendar year. Accordingly, we believe that no adjustments or reclassifications
of our recorded assets and liabilities are necessary at this time.
RESULTS OF OPERATIONS
THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2007 COMPARED WITH THREE MONTHS
AND NINE MONTHS ENDED SEPTEMBER 30, 2006
REVENUES
Our revenue, net of returns, allowances and discounts, for the three and nine
month periods ended September 30, 2007, was $2,153 and $7,403, respectively,
compared to $294 and $10,882, respectively, for the comparable three and nine
month periods of 2006.
In addition, we did not make any commercial sales of our product as we continued
to focus on improving our cost structure in order for us to be competitive as
our product launches have begun to occur, particularly as it relates to the
commercial printing industry. In addition, we have concentrated on building our
inventory in anticipation of the demand for our new product once we launched it
during September 2007. We believe we will achieve our goal of introducing a wide
range of new product lines for the graphic industry market by the end of the
year 2007. We anticipated that we would start to introduce our new product lines
late in the fourth quarter of 2006; however, due to a technical complication we
had to postpone the product launch.
GROSS PROFIT
Our gross profit was $1,012 (47.00%) and $3,612 (48.79%) for the three and nine
month periods ended September 30, 2007, compared to a gross profit of $176
(59.86%) and $5,863 (53.88%) for the comparable three and nine month periods
ended September 30, 2006, respectively. The decrease in the level of the gross
profit margin was primarily due to additional costs related to some of the raw
materials we use in the manufacture of our product.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses increased by $6,977 (27.19%) and $8,602
(10.84%) for the three and nine month periods ended September 30, 2007,
respectively, to $32,706 and $87,951, respectively, from $25,729 and $79,349 for
the comparable three and nine month periods of 2006. The increase during the
three and nine month periods ended September 30, 2007 is primarily related to an
increase in the renewal costs of our patents, held by our Subsidiary. The
increase in the patent renewal costs is primarily attributable to a weaker US
dollar against the Swiss franc. The increase in patent renewal costs was offset
by a decrease in specific costs incurred in relation to testing of new raw
materials, during manufacturing trial runs, to be used in the manufacturing of
the Luminescent Product. During the comparable period of 2006, we tested various
mediums to be used for our printable surface and various pigments to be used to
create our Luminescent "effect."
SELLING AND MARKETING EXPENSES
Selling and marketing expenses consist of payroll, costs to maintain our
website, travel and fees paid in connection with promotional activities, press
releases and shareholder communications. Selling and marketing expenses
increased by $22,663 (100.77%) and $99,655 (371.28%) for the three and nine
month periods ended September 30, 2007, respectively, to $45,153 and $126,496,
respectively, from $22,490 and $26,841 for the comparable three and nine month
periods of 2006. The increase in selling and marketing expenses was due to the
reallocation of certain employee compensation, increases in costs related to the
redesign of our website and increases in costs for marketing and promotion and
travel related to our product launch during the third quarter of 2007.
16
We anticipate that as our products are launched, our selling and marketing
expenses will increase significantly as we introduce ourselves to the
marketplace and maximize the exposure of our products to the consumer.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consisted primarily of the compensation of
our executive officer, other payroll and related taxes and benefits, deferred
financing expenses and rent as well as legal and accounting fees. General and
administrative expenses increased (decreased) by $(108,444) (-45.05%) and
$161,254 (28.31%) for the three and nine month periods ended September 30, 2007,
respectively to $132,274 and $569,651, respectively, from $240,718 and $408,397
for the comparable three and nine month periods of 2006.
The decrease is primarily attributed to legal and accounting costs incurred
during the three months ended September 30, 2006, which were not incurred during
the three months ended September 30, 2007, relating to the restatement of our
previously filed annual reports on Form 10-KSB for 2004 and 2005 and our
previously filed quarterly reports on Form 10-QSB for all quarterly periods of
2005 and 2006.
The increase between the nine month periods ended September 30, 2007 and 2006,
was primarily due to an increase in professional fees and printing costs
relating to the amending and restating of our 2004 and 2005 Annual Reports on
Form 10-KSB and our Quarterly Reports on Form 10-QSB for the periods ending
March 31, 2005, June 30, 2005, September 30, 2005, March 31, 2006, June 30, 2006
and September 30, 2006. The increase is also attributable to higher professional
fees related to the preparation and filing of our Registration Statement on Form
SB-2 on July 6, 2007 and the amortization of deferred financing expenses
incurred relating to our line of credit, which we acquired in the second quarter
of 2006.
STOCK BASED COMPENSATION
On April 28, 2005, the Board of Directors voted to grant to certain employees,
options for the purchase of 20,000,000 shares of the Company's common stock at
an exercise price of $0.12 per share, exercisable for a period of ten years. For
accounting purposes, these options were not deemed granted because the Company
did not have a sufficient number of shares of authorized common stock available
to issue upon the exercise of any of the options.
As previously discussed, on September 25, 2006, at a special meeting of the
Company's stockholders, the stockholders approved an increase in the Company's
authorized shares of common stock from 100 million to 245 million.
Since the required approval has been obtained from the stockholders, the Company
recognized $1,600,000 of stock based compensation for the three- and nine month
periods ended September 30, 2006.
On September 11, 2007, we issued 2,000,000 shares of common stock, valued at
$60,000, as consideration for a two year consulting contract with a significant
stockholder. These shares were issued at $0.03 per share, the closing price of
our common stock on September 11, 2007, the date the Board of Director's
corporate resolution to enter into the contract and issue the shares.
The consulting contract is being amortized over its stated term. As a result, we
recognized $ 1,642 of stock based compensation for the three and nine month
periods ended September 30, 2007.
OTHER INCOME (EXPENSE)
INTEREST INCOME
For each of the three and nine month periods ended September 30, 2007 and 2006,
interest income was $0, $3,182, $37 and $9,443, respectively. Interest income
was earned on the note receivable from a related party.
FOREIGN EXCHANGE GAINS (LOSSES)
We pay all of the expenses of our subsidiary, which are comprised of general and
administrative expenses and expenses for research and development. Expenses of
the subsidiary are denominated in Swiss francs, translated into U.S. dollars,
which we record on the invoice date. Differences between the amount of U.S
dollars required to purchase sufficient Swiss francs to pay the subsidiary's
liabilities on the invoice date, and the required amount of US dollars to
17
purchase Swiss francs when the subsidiary's liabilities are paid, are recorded
as charges or credits to the income statement under the caption "Foreign
exchange gains (losses)." For the three and nine month periods ended September
30, 2007 and 2006, gains recognized from these differences were $0, $0, $0 and
$17,656, respectively.
GAIN (LOSS) ON VALUE OF DERIVATIVE LIABILITIES
Gains (losses) on value of derivative liabilities of $0, $(162,545), $0 and
$72,942 for the three and nine month periods ended September 30, 2007 and 2006,
respectively, related to the warrant liability. Such derivative liabilities were
required to be marked-to-market under generally accepted accounting principles.
See a further discussion in NOTE 11 - WARRANT LIABILITY in the notes to our
consolidated financial statements.
FINANCING COSTS
In the second quarter of 2007, we modified the terms of certain warrants issued
to investors. As a result of the modifications, we recognized financing costs of
$0 and $128,680 for the three and nine month periods ended September 30, 2007.
See a further discussion in NOTE 12 - CAPITAL STOCK - ISSUANCES OF WARRANTS, in
the notes to our consolidated financial statements.
INTEREST EXPENSE
For the three and nine month periods ended September 30, 2007 and 2006, interest
expense was $38,734, $23,542, $109,752, and $30,041, respectively. Interest
expense is dependent on the outstanding balance of our line of credit entered
into on June 8, 2006 and the outstanding balance of cash advances we received
from our president.
For the three and nine month periods ended September 30, 2007 and 2006, we
incurred interest of $33,222, $23,167, $99,362, and $22,946, respectively, on
our line of credit. We also incurred interest on cash advances from our
president of $5,512, $375, $10,390 and $7,095, respectively.
INCOME TAXES
We have not calculated the tax benefits of our net operating losses, since we do
not have the required information. Due to the uncertainty over our ability to
utilize these operating losses, any deferred tax assets, when determined, would
be fully offset by a valuation allowance. During the fourth quarter of 2006, we
began the process of meeting our delinquent tax reporting obligations and
anticipate having all of our delinquent filings resolved during 2007.
LIQUIDITY AND CAPITAL RESOURCES AS OF SEPTEMBER 30, 2007
Since inception, our operations have not generated sufficient cash flow to
satisfy our capital needs. We have financed our operations primarily through the
private sale of shares of our common stock, warrants to purchase shares of our
common stock and debt securities. We have generated, from inception through
September 30, 2007, cumulative net cash proceeds from the sale of our equity of
approximately $4.95 million. Our net working capital deficit at September 30,
2007 was $1,358,163 compared to a deficit of $829,695 at December 31, 2006.
Our authorized capital stock consists of 245,000,000 shares of common stock, of
which 143,142,837 shares were issued and outstanding at September 30, 2007. The
number of shares issued excludes shares of common stock to be issued upon the
exercise of outstanding options and warrants.
Cash decreased to $24,078 at September 30, 2007 from $51,836 at December 31,
2006.
Net cash used for operating activities for the nine months ended September 30,
2007 was $803,934. The primary reason for the decrease was to fund the loss for
the period.
Net cash provided by investing activities for the nine months ended September
30, 2007 was $11,030 and represented collections of the related party note
receivable including $37 of interest due on the note.
Net cash provided by financing activities for the nine months ended September
30, 2007 was $763,065. The net cash provided was the result of cash advances
from related parties of $802,400, less net repayments of advances from related
parties of $19,250 and payment of deferred offering costs $20,085.
18
On March 30, 2007, we entered into the SEDA with Cornell, pursuant to which we
may, at our discretion, under certain circumstances, periodically sell to
Cornell shares of our common stock for a total purchase price of up to
$10,000,000. For each share of common stock purchased under the SEDA, Cornell
will pay us ninety-six percent (96%) of the lowest volume weighted average price
(as quoted by Bloomberg, LP) of our common stock during the five (5) consecutive
trading days after the Advance Notice Date (as such term is defined in the
SEDA), subject to any reduction pursuant to the terms therein. On the Closing
Date, we paid to Cornell a non-refundable due diligence fee equal to $5,000 and
issued 4,000,000 shares of common stock (the "Commitment Shares") to Cornell as
a commitment fee, of which 2,000,000 Commitment Shares have demand registration
rights and 2,000,000 Commitment Shares have "piggy-back" registration rights.
Cornell will retain five percent (5%) of each advance under the SEDA. We paid
Yorkville a structuring fee equal to fifteen thousand dollars ($15,000) on the
Closing Date and shall pay five hundred dollars ($500) to Yorkville on each
Advance Date directly out of the gross proceeds of each Advance (as such terms
are defined in the SEDA). Cornell's obligation to purchase shares of our common
stock under the SEDA is subject to certain conditions, including, without
limitation: (a) our obtaining an effective registration statement for shares of
our common stock sold under the SEDA pursuant to that certain Registration
Rights Agreement, dated as of the Closing Date, by and between the us and
Cornell and (b) the amount for each Advance as designated by us in the
applicable Advance Notice shall not be more than three hundred thousand dollars
($300,000).
We also entered into the PAA, dated as of the Closing Date, by and between us
and Newbridge pursuant to which we engaged Newbridge to act as our exclusive
placement agent in connection with the SEDA. Upon the execution of the PAA, we
issued to Newbridge the Placement Agent Shares. Newbridge is entitled to
"piggy-back" registration rights with respect to the Placement Agent Shares.
Under the SEDA, we are required to have filed and declared effective, the
Registration Statement for the sale of our common stock by other parties, of
which Cornell is one of those parties. We filed the required Registration
Statement on July 6, 2007. Until the SEC declares the Registration Statement
effective, we cannot draw down on the SEDA.
On July 25, 2007, we received a comment letter from the SEC regarding our filed
SB-2 statement. As of the date of this filing, we have not responded to the
SEC's inquiry. Until we do so, the Registration Statement cannot be declared
effective.
See a further discussion in NOTE 12 - CAPITAL STOCK - STANDBY EQUITY
DISTRIBUTION AGREEMENT in the notes to our consolidated financial statements.
ABILITY TO CONTINUE AS A GOING CONCERN
At September 30, 2007, we have generated minimal revenues from commercial sales
of the Company's products. To date, our operations have generated accumulated
losses of $14,083,770. At September 30, 2007, our current liabilities exceed our
current assets by $1,358,163. Our ability to remedy this condition is uncertain
due to our current financial condition. These conditions raise substantial doubt
about our ability to continue as a going concern. Our auditors have included a
"going concern" qualification in their auditor's report for the year ended
December 31, 2006. Such a "going concern" qualification may make it more
difficult for us to raise funds when needed. We believe we have the ability to
obtain additional funds from new investors, our principal stockholders and
employees through the issuance of additional debt, equity securities and/or the
exercise of warrants and stock options. In March 2007 we entered into a
$10,000,000 SEDA as previously described in NOTE 12 - CAPITAL STOCK - STANDBY
EQUITY DISTRIBUTION AGREEMENT in the notes to our consolidated financial
statements. In addition, our president has advanced monies totaling $902,400
from January 1, 2007 through November 14, 2007. We are continually having
discussions with investors in our effort to obtain additional financing;
however, there can be no assurances that we will be able to raise the funds we
require, or that if such funds are available, that they will be available on
commercially reasonable terms.
Our ability to continue to operate as a going concern is primarily dependent
upon our ability to generate the necessary financing to effectively market and
produce our products, to establish profitable operations and to generate
positive operating cash flows. If we fail to raise funds or we are unable to
generate operating profits and positive cash flows, there are no assurances that
we will be able to continue as a going concern and we may be unable to recover
the carrying value of our assets. We believe that we will be successful in
generating the necessary financing to fund our operations through the 2007
calendar year. Accordingly, we believe that no adjustment or reclassification of
our recorded assets and liabilities are necessary at this time.
19
CREDIT AVAILABILITY:
As of September 30, 2007, the Company has a $ 750,000 line of credit with
Ross/Fialkow Capital Partners, LLP, Trustee of the Brightec Capital Trust, of
which $100,000 is unused. See NOTE 9 - LINE OF CREDIT for a discussion of the
major terms of the agreement.
At December 31, 2006, we were not in compliance with the terms of the agreement
as we did not file the Registration Statement (on Form S-1 or SB-2) by December
31, 2006. On March 15, 2007, the Loan and Security Agreement was amended as
follows:
1. The due date of the agreement was extended to July 15, 2007.
2. The date by which the Company was required to file the
Registration Statement on Form S-1 (or SB-2), covering the
underlying shares of common stock to potentially be issued
upon conversion, was extended to July 15, 2007.
On June 27, 2007, we entered into an agreement with Ross/Fialkow, in exchange
for a $5,000 renewal fee, to extend the expiration date of the Loan and Security
Agreement until December 31, 2007. On July 6, 2007, we filed the Registration
Statement on Form SB-2 Statement with the SEC, which included the shares of our
common stock to be sold by Ross/Fialkow.
COMMITMENTS:
The Company had no material capital expenditure commitments as of September 30,
2007.
EFFECTS OF INFLATION:
Management believes that financial results have not been significantly impacted
by inflation and price changes.
20
ITEM 3. CONTROLS AND PROCEDURES
During the last seven years, we did not have an accounting department, but
instead relied on outside bookkeeping services to record financial activity and
consultants to assist in the preparation of our financial statements. Upon the
completion of the audit of the December 31, 2005 financial statements, the
Company received a letter from our former independent registered public
accounting firm indicating that the Company has material weaknesses with respect
to (1) accurately recording day-to-day transactions, (2) the lack of segregation
of duties, (3) the approval of significant transactions in a timely manner by
the Company's Board of Directors and (4) the preparation of its financial
statements, in an accurate and timely fashion. Our management agreed with the
assessment of our former independent registered public accounting firm and we
developed a plan to address these material weaknesses, which we are in the
process of implementing.
During the quarter ended September 30, 2006, we carried out an evaluation of the
effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Rule 13a-14 under the Securities and Exchange of 1934, as
amended.
During the three and nine month periods ended September 30, 2007, we carried out
an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer, Chief Financial Officer and
Treasurer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to Rule 13a-14 under the Securities and
Exchange of 1934, as amended.
During the calendar years ended December 31, 2006 and 2005, we had insufficient
numbers of internal personnel possessing the appropriate knowledge, experience
and training in applying accounting principles generally accepted in the United
States and reporting financial information in accordance with the requirements
of the Commission. The evaluation found insufficient controls over dissemination
of information regarding non-routine and complex transactions, which resulted in
incorrect treatment and lack of proper analysis of such transactions by
accounting staff. This weakness resulted in material adjustments proposed by our
independent registered accountants with respect to our financial statements for
our calendar years ended December 31, 2006 and 2005. As a result, the figures
for the three and nine month periods ended September 30, 2006, which are
presented in this document, required restatement from their previous filing. We
believed this issue to be material and therefore, deemed the design and
operation of internal control in place at December 31, 2005 and for the three-
and nine months periods ended September 30, 2006, to be ineffective.
In late 2005, the Company hired a CPA to oversee the accounting department and
coordinate the efforts of analysis and dissemination. These efforts include
design changes and related monitoring of the internal control system. While
there has been a tremendous improvement in the internal control system in the
first nine months of 2007, the system is still undergoing change in order to
satisfy the requirements of appropriate internal controls. It is our intention
to address accounting issues on a timely basis, and prevent misstatement based
on errors and/or lack of understanding.
Our management and Board of Directors are fully committed to the review and
evaluation of the procedures and policies designed to assure effective internal
control over financial reporting. It is our opinion that this new addition to
the internal accounting staff will assist in the establishment of an effective
design and operation of the internal control system and therefore, improve the
quality of future period financial reporting.
We are continually monitoring our internal control system for weaknesses and
ways in which the system might be improved to further enhance the effectiveness
of our controls over the material weaknesses identified by our independent
registered public accounting firm and to ensure and enhance effective controls
over the analysis, preparation and dissemination of our financial information.
21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings pending to which the Company is a party
or to which any of its properties are subject.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following equity transactions occurred during the period July 1, 2007 to
September 30, 2007 and were not registered under the Securities Act of 1933, as
amended (the "Securities Act").
On September 11, 2007, we issued 2,000,000 shares of our common stock, valued at
$60,000, as consideration for a two year consulting contract with a significant
stockholder. These shares were issued at a market price of $0.03 per share, the
closing price of our common stock on September 11, 2007, the date the Board of
Director's corporate resolution to enter into the contract and issue the shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not Applicable
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5. OTHER INFORMATION
Not Applicable
22
ITEM 6. EXHIBITS
Number Description of Exhibit
- ------ ----------------------
10.29 Consulting Agreement dated September 11, 2007 between Brightec, Inc.
and Jeffrey Stern, Trustee of the Jeffrey Stern Revocable Trust.
31 Certification of Patrick Planche, President and Chief Executive
Officer and Chief Financial Officer, pursuant to Rule 13a-14(a) of
the Securities Exchange Act of 1934, as amended.
32 Certification of Patrick Planche, President and Chief Executive
Officer and Chief Financial Officer, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRIGHTEC, INC.
Date: November 19, 2007 By: /s/ PATRICK PLANCHE
-------------------------------------
Patrick Planche
President and Chief Executive Officer
24
EXHIBIT INDEX
Number Description of Exhibit
- ------ ----------------------
10.29 Consulting Agreement dated September 11, 2007 between
Brightec, Inc. and Jeffrey Stern, Trustee of the Jeffrey
Stern Revocable Trust (filed herewith) E-1 - E-7
31 Certification of Chief Executive and Financial Officer
Pursuant to 18 U.S.C. Section 1850, As Adopted Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
(filed herewith) E - 8
32 Certification of Chief Executive and Financial Officer
Pursuant to Rule 13a-14(b) of the Exchange Act and 18
U.S.C. Section 1850, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002. (filed herewith) E - 9
25